Thursday, July 12, 2012

Thursday Energy Links

1. Pennsylvania's electric generation rates are back to 1996 levels, thanks to competition and shale gas, according to John Hanger


2. According to this IEA report on North American Tight Oil Breakeven prices, oil would have to fall below $44 per barrel before Bakken shale oil would become unprofitable, and below $50 per barrel before Eagle Ford shale oil would be unprofitable (see chart above).


3.  From Investor's Business Daily: "After decades of rising prices, hostile foreign suppliers and warnings that Americans will have to bicycle to work, the world faces the possibility of vast amounts of cheap, plentiful fuel. And the source for much of this new supply? The U.S.

"If this is true, this could be another dominant American century," said Brian Wesbury, chief economist at First Trust Advisors, money managers in Wheaton, Ill.

U.S. natural-gas production is growing 4% to 5% a year, driven by sharply higher shale gas output. Shale gas production is forecast at 7.609 trillion cubic feet this year, up 11.6% from 2011 and 12 times the 2004 level (see chart above for the shale gas production forecast to 2035).

Citigroup predicts the U.S. will be not just self-sufficient but also a huge exporter of oil and gas by 2020. The bank projects that the surge in domestic oil and gas supply will add 2% to 3% in real GDP, create 2.7 million to 3.6 million new jobs and cut the current account deficit by 2.4% of GDP.

High on the winner list would be energy-intensive manufacturing, which has taken a thrashing the past few decades. "It could open the floodgates of investment in the U.S.," Wesbury said."

41 Comments:

At 7/12/2012 11:46 AM, Blogger Buddy R Pacifico said...

At the risk of looking a bit like one frequent shale oil commenter who is negative:

I ask how can Bakken have a lower breakeven oil price then the Permian (Midland) in Texas?

Drilling costs are about $7 million in the Bakken per well (although coming down) and about $4million (going up because of water shortages).

 
At 7/12/2012 12:04 PM, Blogger Larry G said...

how is the Bakken oil getting refined?

Where how how does it get there?

I keep hearing it's shipped by train but what pipelines are needed and where are they proposed?

or is the sustainability of the oil not of a long enough duration to justify new pipelines?

 
At 7/12/2012 12:26 PM, Blogger Jon Murphy said...

I ask how can Bakken have a lower breakeven oil price then the Permian (Midland) in Texas?

Maybe Permian is tighter than Bakken?

how is the Bakken oil getting refined?

Bakken goes to Oklahoma for refining, I think.

or is the sustainability of the oil not of a long enough duration to justify new pipelines?

It takes a while to build new pipelines. Keystone was meant to be part of the solution here.

 
At 7/12/2012 12:46 PM, Blogger rjs said...

current price on north dakota sweet is $61

 
At 7/12/2012 12:47 PM, Blogger Buddy R Pacifico said...

my comment was not complete:

"Drilling costs are about $7 million in the Bakken per well (although coming down) and about $4million (going up because of water shortages)."

$4 million drilling cost in the Texas Permian vs. $ 7 million in the Bakken.

 
At 7/12/2012 1:03 PM, Blogger Buddy R Pacifico said...

"current price on north dakota sweet is $61"

Current Price Bakken Crude is $79.29 (11:00 am PDT 7-12-12).

 
At 7/12/2012 1:08 PM, Blogger Che is dead said...

Continental Resources claims that it will be able to get the costs of drilling a well below $6 million using their "ECO-pad" walking drill technology. Harold Hamm says that most of the technologies being used in the Bakken have been developed in the past 3 years and he expects further innovation to substantially reduce costs going into the future.

 
At 7/12/2012 1:24 PM, Blogger Che is dead said...

"Pennsylvania's electric generation rates are back to 1996 levels, thanks to competition and shale gas ..."

Compare and contrast:

"California's economy is still struggling, the jobless rate is 10.8%, and AB 32's taxes and regulations are starting to bite. Two new studies by private consulting firms add up the real-world cost to California families and businesses. ... these policies raise energy costs and are expected to reduce state GDP by between 3.5% and 8.9% by 2020 ... The cost per California family is estimated at $2,500 a year ... a major way Californians will reduce their greenhouse emissions is by slower growth, chasing industry out of the state, and putting more people out of work. If Californians produce less, their carbon footprint is smaller ... the California government is forcing oil and gas companies to sell a fuel that barely exists. The only viable short-term compliance option is for California to import sugar-cane ethanol from Brazil. One result is that gasoline prices could rise by anywhere between 50 cents and $2.70 a gallon at the pump after 2015, says BCG. Californians could pay $6 a gallon." -- WSJ

Modern "liberalism" or "progressivism" is a mental disorder.

 
At 7/12/2012 2:04 PM, Blogger Jon Murphy said...

If you go back and look at US economic history, you'll notice that we always find a new industry to revive our economy from the doldrums of a crisis/recession/depression:

After WWII, it was manufacturing.

After the Revolutionary War, it was cotton.

After the War of 1812, it was shipping.

After the 1980's, it was technology.

Will oil & natural gas be this recession's turn-around industry?

 
At 7/12/2012 2:36 PM, Blogger rjs said...

buddy, my source for dakota oil prices:
http://www.paalp.com/_filelib/FileCabinet/Crude%20Oil%20Price%20Bulletins/Daily/2012/2012-118_July_09_2012.pdf

bloomberg is "is priced for delivery at Clearbrook, MN."

 
At 7/12/2012 2:37 PM, Blogger Dave said...

Dr. Perry must laugh when he reads some of these comments. D

 
At 7/12/2012 2:41 PM, Blogger Jon Murphy said...

rjs-

Why is the ND sour crude higher in price than ND sweet? That doesn't make sense since sour crude is full of impurities.

 
At 7/12/2012 2:58 PM, Blogger Buddy R Pacifico said...

rjs,

Your price is undelivered and mine is after delivery to Clearbrook, MN distribution center/refinery.

thus, the price discrpency.

Crude prices, even for the same grade, can vary depending on proximity to distribution center/refinery.

 
At 7/12/2012 3:02 PM, Blogger Larry G said...

just out of curiosity - what happens to the excess once the refinery is at capacity?

is the price of the excess oil that cannot be locally refined...affected?

would excess oil be left in the ground or put on trains or pipelined?

Oh.. and the REFINED product - how is that shipped and to where?

is it consumed in the region and not exported?

 
At 7/12/2012 4:32 PM, Blogger morganovich said...

jon-

my (admittedly limited) understanding is that the issue with grades and their pricing differential has more to do with refining capacity than difficulty of refining.

if you have a lot of capacity set up for heavy sour and not much for light sweet, LSw can carry a lower price despite being easier to refine.

my understanding is that we have more HSo capacity than LSw.

in a normal market, you would expect more LSw refineries to be built, but the regulations around building a refinery in the US are so odious and impossible that adding new capacity is all but impossible.

 
At 7/12/2012 5:50 PM, Blogger Unknown said...

But ... but ... this cannot possibly be true - VangelV says oil needs to be $150 for the Bakken to be profitable.

/sarcasm

 
At 7/12/2012 6:09 PM, Blogger Jon Murphy said...

my understanding is that we have more HSo capacity than LSw.

That is possible (I have no idea what kind of refineries we have), but if that were the case, then why would only ND have Sour higher priced then Sweet? Maybe the refinery closest to them is a Sour refinery? I really don't know.

 
At 7/13/2012 1:45 AM, Blogger PeakTrader said...

"Citigroup predicts the U.S. will be not just self-sufficient but also a huge exporter of oil and gas by 2020. The bank projects that the surge in domestic oil and gas supply will add 2% to 3% in real GDP, create 2.7 million to 3.6 million new jobs and cut the current account deficit by 2.4% of GDP."

What does this really mean?

More resources will shift from other economic activity to extracting oil.

Oil prices will rise, because oil will be increasingly harder to extract.

This will not improve U.S. living standards, except with massive idle resources, in this depression, they'll be employed less efficiently rather than remain idle.

Nonetheless, the shift in production and prices are inevitable, and the government should've promoted, rather than prevented, oil production.

 
At 7/13/2012 6:33 AM, Blogger JJ Butler said...

The $44 Bakken break even number totally misleads. Perhaps it is true on a cash flow basis for wells. But these companies developed large overhead to carry out their operations and have borrowed hundreds of millions of dollars each. In fact, current prices leave them with capex funding gaps. Give them $44 oil and Bakken production would do a big U-turn down within quarters.

The Bakken is great, but it absolutely requires robust oil prices.

 
At 7/13/2012 6:56 AM, Blogger Larry G said...

I found this article interesting:

" As battery prices drop, will electric cars finally catch on?"

excerpt: " But what if the economics of car batteries changed drastically? New research from analysts at the McKinsey & Company suggests that the price for lithium-ion batteries could fall by as much as two-thirds by 2020. Instead of $600 per kilowatt-hour today, batteries would cost just $200/kwh in 2020 and $150/kwh in 2025. And that, the report suggests, would upend the entire automobile industry."

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/07/12/as-battery-prices-drop-will-electric-cars-finally-catch-on/

the question is not so much whether this will ever happen, but WHEN.

At the point that battery technology drops in price to a certain price point - what happens to the oil industry if electric cars ever become economically competitive to traditional ICE vehicles?

do we ever reach a time where oil demand plummets?

 
At 7/13/2012 7:01 AM, Blogger Jon Murphy said...

JJ Butler-

From my understanding, that BE point takes into account those costs, too

 
At 7/13/2012 7:05 AM, Blogger Jon Murphy said...

At the point that battery technology drops in price to a certain price point - what happens to the oil industry if electric cars ever become economically competitive to traditional ICE vehicles?

You'd probably see Exxon, Chevron, etc., go into batteries.

I've no doubt that battery technology is getting better. Maybe one day we will have a good, cheap, reliable, electric car. When that day comes, I'll be the first to buy it.

 
At 7/13/2012 7:07 AM, Blogger Larry G said...

check out this chart:

http://www.washingtonpost.com/blogs/ezra-klein/files/2012/07/electric-vehicle-adoption.jpg

look at the price of battery vs price of gasoline.

 
At 7/13/2012 7:31 AM, Blogger Jon Murphy said...

Aye. Very good chart, Larry. Although the post also makes a point that I think is valid when dealing with batteries: the range (right now) is limited to about 75 miles. A ICE has a range of 300-400 miles. Even is most people drive less than 75 miles per day, they do not want to be limited by that. Until batteries become better in that aspect (and the price of a battery car comes down from the whopping $40K), then electric cars will be a pipe dream.

 
At 7/13/2012 7:41 AM, Blogger Larry G said...

@Jon

agree - which is why I think the Chevy Volt has the right answer.

It runs on electric til the battery dies then runs on gas - for 300 miles.

if you think about this - the only change the Volt has to do to go forward is ...lower the price every time the battery prices go down.

When the Volt (and other models) drop to comparative ROI to ICE-only cars - the switch-over will accelerate.

The question is WHEN, not if.

Demand for oil will still exist but how much drop?

When that happens the marginal oil will no longer be profitable, right?

 
At 7/13/2012 7:46 AM, Blogger Jon Murphy said...

I agree completely, Larry.

Given the advances in battery technology (which is coming more from the hand-held electronic side, as opposed to the car side), the fall of natural gas prices, and improvements in energy efficiency, I think oil's days as the primary energy source in America are numbered. Even big oil companies are seeing this trend (as evidenced by their increased investment in natural gas and other alternative energies).

 
At 7/13/2012 8:06 AM, Blogger bart said...

"Interesting" that that first chart doesn't include land costs. What else is missing? How much creative accounting is involved, especially on depreciation?

Residential electric rates are up across the country on a YoY basis, and have been climbing since early 2010. All sectors are also up substantially since 2006-8, per the EIA.

And total electricity generation in the most recent month is running about 10% under the average from 2005-2011.

Prices up, demand down... amongst the many items that make one go hmmmm.

 
At 7/13/2012 8:10 AM, Blogger bart said...

"Pennsylvania's electric generation rates are back to 1996 levels..."

What about prices?



Peak cheap oil is alive and well.

 
At 7/13/2012 8:16 AM, Blogger bart said...

"Citigroup predicts the U.S. will be not just self-sufficient but also a huge exporter of oil and gas by 2020."

Self serving horse puckey from a bank that missed every major move (likke dot com, housing, the crisis) at least since 2000, and has seen their stock price drop ~90%.

What a great prediction track record! /sarc

 
At 7/13/2012 2:06 PM, Blogger VangelV said...

1. Pennsylvania's electric generation rates are back to 1996 levels, thanks to competition and shale gas, according to John Hanger.

While Mr. Hanger mentions natural gas his biggest point is about falling rates due to increased competition.

The way I see it electricity demand is collapsing and keeping fuel costs for electricity producers who use gas (and coal) very low. The problem is that even the recent increase in demand due to the hot weather has not had much of an effect on gas prices even as old coal plants are closing down. This means that the price of natural gas will have to rise and the fuel costs will have to go up. This time around the surviving gas producers will not drill until they have hedged their sales forward at a price that is high enough to justify the risk. That means at least $7.50 plus a premium that allows the survivors to pay off their debts or $7.50 if the industry is decimated.

2. According to this IEA report on North American Tight Oil Breakeven prices, oil would have to fall below $44 per barrel before Bakken shale oil would become unprofitable, and below $50 per barrel before Eagle Ford shale oil would be unprofitable (see chart above).

Is this the same IEA that got the global depletion rate wrong by 81%?

http://tinyurl.com/7dal464

http://tinyurl.com/ct6ldks

It might be a better idea to start to look at the actual data and see reality as it is rather than to cherry pick data that sells a narrative that is full of holes and cannot be defended properly.

 
At 7/13/2012 10:01 PM, Blogger Unknown said...

"It might be a better idea to start to look at the actual data and see reality as it is rather than to cherry pick data that sells a narrative that is full of holes and cannot be defended properly."

Oh the irony.

 
At 7/14/2012 9:53 AM, Blogger Jon Murphy said...

It might be worth nothing that the IEA Did not conduct this study, but rather just published it. The study was conducted by Rystad Energy.

 
At 7/14/2012 11:25 AM, Blogger VangelV said...

It might be worth nothing that the IEA Did not conduct this study, but rather just published it. The study was conducted by Rystad Energy.

So what? The same type of studies were published by the IEA (and EIA) when they underestimated the depletion rates by more than 80%. The fact is that these bodies have been overestimating recovery rates and economics for a very long time. Not very long ago the IEA was calling for the peak in conventional oil production to come in after 2035. Then, after the skeptics forced it to reexamine its assumptions the 2009 IEA report quietly admitted that conventional oil had peaked in 2006. The new claim was that unconventional oil would quickly come on line to offset some of the 6.7% depletion rate from existing fields and that total liquids production would keep growing until 2035. The trouble is that the claims are no more supported by actual data than the previous claims about conventional oil.

The argument is still the same. Most of our oil comes from conventional sources and most producing nations are in decline and well below their peak levels. Anyone who understands tight oil production is aware that the process is not very cheap and that depletion rates are very high. The SEC reports show that the producers have been unable to self finance even though many of them have been in business for a decade or more. The balance sheets show exploding debt levels and that does not include the off balance sheet accounting tricks. On the conference calls management groups are brining up funding gaps that need to be closed by further equity dilution, more borrowing, asset sales, or a combination of the three. Between the filings and the conference calls we don't have a picture of a healthy industry and have a clear indication that the AVERAGE well is not profitable.

 
At 7/14/2012 11:37 AM, Blogger bart said...

... the IEA (and EIA) when they underestimated the depletion rates by more than 80%.

Or "Dow 30,000" or "a permanent plateau of prosperity" or even "fracking and Bakken etc. will save us and we'll never run out and all is well, and anyone who says otherwise is nuts".




"An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it."
-- Mahatma Gandhi


"First they ignore you, then they laugh at you, then they fight you, then you win."
-- Mahatma Gandhi


The track record of those who can't or won't just plain look at the full facts is virtually assured, and it isn't positive.

 
At 7/14/2012 11:44 AM, Blogger Jon Murphy said...

So what?

Well, you dismissed the study based on the fact that it comes from the IEA. But it didn't. So that criticism doesn't hold.

 
At 7/14/2012 12:24 PM, Blogger bart said...

Well, you dismissed the study based on the fact that it comes from the IEA. But it didn't. So that criticism doesn't hold.

The study was conducted by Rystad Energy.


Au contraire, study breath.

Rystad is an oil & gas consulting firm and their vested interest is obvious, as are so many government studies, as V showed from the EIA depletion rate truly gigantic miss and their huge miss of "peak cheap oil".

I strongly suspect the same kind of bias and spin from the ND one too, once enough time goes by and we see studies that actually take everything into account, like real cash flow in an *entire* area.

 
At 7/14/2012 12:47 PM, Blogger Jon Murphy said...

That is true, Bart, but not what V said.

Vangel dismissed the study because it was from the IEA. That is not valid.

You are dismissing the study because you see a conflict of interest (what you rightfully call a "vested interest"). That is a valid criticism.

 
At 7/14/2012 1:06 PM, Blogger bart said...

Vangel dismissed the study because it was from the IEA. That is not valid.

I think it is, given their track record - and vested interest too.
I think V was referring to it that way too, given how log I've known him and his many posts I've read, here and mostly elsewhere.
But I don't think you'll have to wait long for his response. -g-

From their site:
"The IEA is an autonomous organisation which works to ensure reliable, affordable and clean energy for its 28 member countries and beyond."

 
At 7/14/2012 3:08 PM, Blogger bart said...

morganovich:

OT, but that answer I gave about Tax Freedom day and total taxes was incorrect. I was thinking about another tax series that I track and had a senior moment.

The numbers *do* include employer share of FICA and corporate income taxes, but not any other corporate fees. Basically, other than minor items, it includes everything except the inflation tax.

They've averaged right around 30% for at least the last 40 years in a range from 26.8% to 33.1%.

 
At 7/14/2012 4:01 PM, Blogger VangelV said...

Well, you dismissed the study based on the fact that it comes from the IEA. But it didn't. So that criticism doesn't hold.

Perhaps, but the fact that the 'study' is just the type of speculation that the IEA finds appealing but is far from reality does. Not long ago the IEA was using CERA's peak estimates even though CERA did not use any real field data to support its conclusions. When the EIA, IEA, and CERA were finally forced to look at the real data they found to their surprise that the skeptics were correct about depletion and that their estimates for the peak of conventional oil were off by around 30 years.

The same errors that were made about conventional oil before are being made about unconventional oil today. I see no support for the figure cited by Mark and until I see a real breakdown of the data I will remain skeptical given the fact that the SEC filings show continued negative cash flows and huge debt additions at prices that are HIGHER than those that Rystad Energy is suggesting are sufficient for the companies to break even. This means that either the assumptions of price inflation in the sector is way off, the wrong discount rate is being used, or the company has no real idea what is going on.

 
At 7/14/2012 4:11 PM, Blogger VangelV said...

That is true, Bart, but not what V said.

Vangel dismissed the study because it was from the IEA. That is not valid.

You are dismissing the study because you see a conflict of interest (what you rightfully call a "vested interest"). That is a valid criticism.


Actually, the only thing that is valid is the cash flow and debt data because they are very hard to fake. I dismiss the IEA because its study, no matter who provided a portion of its estimates, is not supported by the data in the SEC filings. I have no trouble with conflict of interest as long as there is transparency and I can take a look at the data and methodology on my own. The conflict is a problem only when both are murky as is the case in the IEA report.

I suggest that the optimists try to look at the older IEA reports and figure out how they were done. Information from people who were involved in the process shows that the IEA never questioned the reserve additions that were reported when OPEC was struggling to control overproduction and used a quota system based on reported reserves. While any rational person would have questioned how most OPEC nations could double reserves without drilling or how Iran and Iraq could double reserves during the middle of a war that they were fighting against each other the fools at the IEA accepted the figures as gospel. Not only that but they ASSUMED that production could increase to meet the projected demand without looking at the engineering papers that outlined some of the problems encountered in the fields or paying attention to the alarming increase in the percentage of water that was being pulled out of the ground along with the oil.

As I pointed out, those that used logic and followed the engineering papers as wells as the drilling history figured out that the numbers were not right long before the consultants and the government agencies had to admit their errors.

It seems to me that history is repeating itself. Not long ago Mark was citing USGS reports that not only considered shale oil to be a solution but argued that oil shale would be a big source of energy in the not too distant future. The optimists went as far as to list twenty projects around the world that were looking at oil shale without catching on that none were economic and scaleable.

 

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